If you’re operating a growing company, you need to ask: What is your burn-rate? How long will the money you have last? When do I need to start raising additional capital? What happens if I don’t raise enough money before we run out of cash?

Cash is critical to a growing company. R&D, marketing and scalability with employees or investors (or both) are often the biggest uses of cash, and it is more often than not that the minute you close one round of financing, you have to be thinking about where your next round is going to come from and how soon you will have to begin raising the funds. In other words, you must know and fundamentally understand your burn-rate and must learn to manage it so that you can avoid creating a liquidity crunch.

A liquidity crunch – or more aptly a liquidity crisis – is where the company is dangerously close to becoming insolvent. In this zone of insolvency, the company may have to consider the liability exposure that may be associated with the inability to pay employees, suppliers, other vendors and creditors.

Are assets secured by UCC filings, for example? In the event of non-payment, a secured lender may be able to take custody of the one asset that is driving your company forward. Then what? How will the company keep going?

And what about employees? If you are running out of money, when do you need to issue pink slips so as not to violate federal and state labor laws?

Having competent counsel advise in the event of a liquidity crunch is critical to help directors and officers avoid civil and potentially criminal liability for non-payment to employees, who have provided services to the company. Indeed, failure to make payroll could become a huge problem depending on the particular facts and circumstances and the jurisdiction in which the employees are located.

How do I avoid this dreaded liquidity crunch? Simple enough: Raise capital before you run out of funds.

Companies that are between a rock and a hard place with cash flow and burn-rate are less likely to get favorable terms on an additional capital raise than companies that are not as cash strapped, assuming the company is otherwise attractive to potential investors. If you start scoping out new money before you need it and time the raise carefully, you can hopefully have shown the progress needed to get a higher valuation than the prior round. If you’re cash-strapped, you run the risk of a “vulture” attempting to do a down-round or otherwise take advantage of the situation that could make raising additional capital even more difficult.

This Firm has represented companies in connection with liquidity and wind-down issues, as well as advised officers and directors of their fiduciary obligations in such situations. The stakes can be high for companies that are running out of money and the people who are running them.

For example, the Firm has advised the former CEO of a multi-national technology company in connection with his obligations and coordinated efforts with counsel in foreign jurisdictions, where criminal responsibility is a real possibility in connection with the company’s failure to make payroll and in connection with business checks written to payees that were dishonored because the company had run out of funds by the time the checks were presented for payment to a bank.

Navigating the risks with competent counsel is recommended when a company is in a liquidity crisis. Careful planning and good timing are essential to a company’s future success. Plan ahead to avoid stressful, no- or limited-cash-on-hand situations.

The moral of the story: Start your next round of fundraising well before you need it.